Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Certain Market Maker Fees, 7844-7848 [2013-02302]

Download as PDF 7844 Federal Register / Vol. 78, No. 23 / Monday, February 4, 2013 / Notices SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68757; File No. SR–ICEEU– 2012–08] [Release No. 34–68760; File No. SR–ISE– 2013–05] Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Withdrawal of Proposed Rule Change To Clear Western European Sovereign CDS Contracts Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Certain Market Maker Fees January 29, 2013. January 29, 2013. On October 15, 2012, ICE Clear Europe Limited (‘‘ICE Clear Europe’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 1 and Rule 19b– 4 thereunder,2 a proposed rule change to provide for the clearing of Western European Sovereign credit default swap contracts on the following sovereign reference entities: Republic of Ireland, Italian Republic, Hellenic Republic, Portuguese Republic, and Kingdom of Spain. Notice of the proposed rule change was published in the Federal Register on November 2, 2012.3 The Commission received one comment on the proposed rule change.4 On December 14, 2012, the Commission extended the time period in which to either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change, to January 31, 2013.5 On January 24, 2013, ICE Clear Europe withdrew the proposed rule change (SR–ICEEU–2012–08). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.6 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–02299 Filed 2–1–13; 8:45 am] BILLING CODE 8011–01–P mstockstill on DSK4VPTVN1PROD with NOTICES 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 34– 68119 (October 29, 2012), 77 FR 66209 (November 2, 2012). 4 See Comments submitted to the Commission by Darrell Duffie, Stanford University dated November 7, 2012 (https://sec.gov/comments/sr-iceeu-2012-08/ iceeu201208.shtml). 5 See Securities Exchange Act Release No. 34– 68437 (December 14, 2012), 77 FR 75466 (December 20, 2012). 6 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 19:26 Feb 01, 2013 Jkt 229001 Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 17, 2013, the International Securities Exchange, LLC (the ‘‘Exchange’’ or the ‘‘ISE’’) filed with the Securities and Exchange Commission the proposed rule change, as described in Items I, II, and III below, which items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The ISE proposes to amend its Schedule of Fees. The text of the proposed rule change is available on the Exchange’s Web site (https:// www.ise.com), at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in sections A, B and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange currently assesses per contract transaction fees and provides rebates to market participants that add or remove liquidity from the Exchange 1 15 2 17 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00107 Fmt 4703 Sfmt 4703 (‘‘maker/taker fees and rebates’’) in a number of options classes (the ‘‘Select Symbols’’).3 The Exchange’s maker/ taker fees and rebates are applicable to regular and complex orders executed in the Select Symbols. The Exchange also currently assesses maker/taker fees and rebates for complex orders in symbols that are in the Penny Pilot program but are not a Select Symbol (‘‘Non-Select Penny Pilot Symbols’’) 4 and for complex orders in all symbols that are not in the Penny Pilot Program (‘‘NonPenny Pilot Symbols’’).5 The purpose of this proposed rule change is to increase the discount for Market Makers 6 when they trade against Priority Customer 7 orders that are preferenced to them to $0.05 per contract from the fee charged to Market Makers who trade against Priority Customer orders that are not preferenced to them. This discount is currently set at $0.02 per contract and is applicable when Market Makers add or remove liquidity in the Select Symbols (excluding SPY), in SPY, in the Non-Select Penny Pilot Symbols and in the Non-Penny Pilot Symbols from the complex order book.8 Accordingly, Market Makers that add or remove liquidity from the complex order book by trading against Priority Customer complex orders that are preferenced to them will be charged: (i) $0.34 per contract in the Select Symbols (including SPY) and in the Non-Select Penny Pilot Symbols; and (ii) $0.77 per contract in the Non-Penny Pilot Symbols. 3 Options classes subject to maker/taker fees and rebates are identified by their ticker symbol on the Exchange’s Schedule of Fees. 4 See Exchange Act Release Nos. 65724 (November 10, 2011), 76 FR 71413 (November 17, 2011) (SR–ISE–2011–72); and 66961 (May 10, 2012), 77 FR 28914 (May 16, 2012) (SR–ISE–2012– 38). 5 See Exchange Act Release Nos. 66084 (January 3, 2012), 77 FR 1103 (January 9, 2012) (SR–ISE– 2011–84); 66392 (February 14, 2012), 77 FR 10016 (February 21, 2012) (SR–ISE–2012–06); 66961 (May 10, 2012), 77 FR 28914 (May 16, 2012) (SR–ISE– 2012–38); and 67400 (July 11, 2012), 77 FR 42036 (July 17, 2012) (SR–ISE–2012–63). 6 The term ‘‘Market Makers’’ refers to ‘‘Competitive Market Makers’’ and ‘‘Primary Market Makers’’ collectively. See ISE Rule 100(a)(25). 7 A Priority Customer is defined in ISE Rule 100(a)(37A) as a person or entity that is not a broker/dealer in securities, and does not place more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s). 8 The current $0.02 per contract discount also applies to a group of symbols in which Market Makers can enter quotes in the complex order book (‘‘Complex Quoting Symbols’’). The discount applicable to the Complex Quoting Symbols is found on the Exchange’s Schedule of Fees. See Section II. Complex Order Fees and Rebates, footnote 4. This proposed rule change also applies to the Complex Quoting Symbols. E:\FR\FM\04FEN1.SGM 04FEN1 Federal Register / Vol. 78, No. 23 / Monday, February 4, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES The Exchange notes that NASDAQ OMX PHLX, Inc. (‘‘PHLX’’) currently has a $0.05 per contract differential between the fee it charges market makers for complex orders in certain symbols and the fee it charges directed (i.e., preferenced) market makers for the same transactions.9 With this proposed rule change, ISE seeks to adopt the $0.05 differential currently in place at PHLX. The Exchange notes that the fee differential currently between Market Makers and preferenced Market Makers on ISE is $0.02 per contract where a preferenced Market Maker is assessed the lower fee. The Exchange is now proposing to increase the differential from $0.02 per contract to $0.05 per contract for complex order transactions to reflect the increased costs that are incurred by such Market Makers that enter into order flow arrangements at a cost and without the benefit of a guaranteed allocation.10 The Exchange believes that in order to attract Priority Customer complex orders in an intensely competitive environment it must continue to adjust its fees and rebates, which ultimately benefit all market participants. Market Makers may be categorized as preferenced Market Makers when such Market Makers execute against a Priority Customer order preferenced to them for execution by an order flow provider. For example, Market Maker ABCD is assessed the preferenced Market Maker fee for trading against a Priority Customer order preferenced to it for execution by an order flow provider. Market Maker ABCD is not assessed the discounted preferenced Market Maker fee for executing a Priority Customer order that is not preferenced to Market Maker ABCD, but rather is assessed the full Market Maker fee. The Exchange notes that all Market Makers have the ability to incentivize an order flow provider to preference an order if they desire to enter into, for 9 See Section I, Rebates and Fees for Adding and Removing Liquidity in Select Symbols, Part B. Complex Order at https://nasdaqomxphlx.cchwall street.com/NASDAQOMXPHLXTools/Platform Viewer.asp?selectednode=chp%5F1%5F4& manual=%2Fnasdaqomxphlx%2Fphlx%2Fphlx%2 Drulesbrd%2F. see also Securities Exchange Act Release No. 68202 (November 9, 2012), 77 FR 68856 (November 16, 2012) (the ‘‘PHLX Approval Order’’). 10 The Exchange notes that under ISE Rule 722(b)(3), the Exchange has the ability to provide Market Makers with a guaranteed allocation and the Exchange may do so by designating on a class basis where such guaranteed allocations would apply. The Exchange, however, has not designated any class as such. In the event the Exchange designates certain classes to provide Market Makers the benefit of a guaranteed allocation in those classes, the discount proposed in this filing will not apply to those preferenced Market Makers in those classes of options designated by the Exchange. VerDate Mar<15>2010 19:26 Feb 01, 2013 Jkt 229001 example, a payment for order flow arrangement with an order flow provider. While all market participants enjoy the benefits of the liquidity that such order flow brings to the market, not all market participants incur the additional expense of paying an order flow provider for such order flow. The Exchange believes that this additional expense should be considered in assessing fees to Market Makers that attract such order flow to the Exchange for the benefit of all market participants. The Exchange proposes to implement this proposed rule change on a pilot basis set to expire one (1) year from the date the proposed fees become operative. In support of this proposed rule change, the Exchange agrees to submit to the Commission on a monthly basis during the pilot period certain summary data as the Commission may request regarding this proposed fee change and make this data publicly available. The data would include information with respect to rates of order interaction of Priority Customer complex orders and rates of price improvement, and an analysis of the effect of the fee differential upon intermarket and intra-market competition. In addition, the Exchange also agrees to submit data, and make it publicly available, on (1) the rate of interaction with preferenced Priority Customer complex orders by both preferenced Market Makers and non-preferenced Market Makers, (2) the rates of price improvement for preferenced Priority Customer complex orders that received price improvement by both preferenced Market Makers and non-preferenced Market Makers, and (3) the percentage of preferenced and non-preferenced Priority Customer complex orders that received price improvement, and the average price improvement for such orders, for the six months prior to the time that this proposed fee became operative (i.e., July 2012 through December 2012) to allow the Commission to analyze the impact of the proposed fee change. The Exchange represents that the proposed fee change will apply only to equity options that are able to be listed and traded on more than one options exchange. There will be no discount for Singly Listed Symbols and FX Options Symbols.11 The Exchange further represents that, prior to and at the time 11 Singly Listed Symbols and FX Options Symbols are identified by their ticker symbol on the Exchange’s Schedule of Fees. The Exchange is not providing this fee discount to Singly Listed Symbols and FX Options Symbols because these symbols are traded only on ISE and therefore, the Exchange does not need to provide an incentive to attract order flow in them. PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 7845 of a complex order transaction, Market Makers, including preferenced Market Makers, are unaware of the identity of the contra-party to the transaction and moreover, ISE Rule 400 titled ‘‘Just and Equitable Principles of Trade’’ is intended to prohibit coordinated actions between preferenced Market Makers and order flow providers, and that the Exchange proactively conducts surveillance for, and enforces against, such violations. The Exchange also proposes to make one non-substantive amendment to the Exchange’s Schedule of Fees. Specifically, the Exchange proposes to remove footnote 7 under Section I, Regular Order Fees and Rebates, as that footnote is no longer applicable. Footnote 7 was previously applicable to Special Non-Select Penny Pilot Symbols (‘‘SNS Symbols’’), a group of symbols that were a part of Section I of the Schedule of Fees. The Exchange recently removed the SNS Symbols from the Schedule of Fees in its entirety and moved them into the Select Symbols category.12 The Exchange inadvertently failed to remove footnote 7 when it filed to remove the SNS Symbols and proposes to do so now. The Exchange is not proposing any other changes in this filing. 2. Statutory Basis The Exchange believes that its proposal to amend its Schedule of Fees is consistent with Section 6(b) of the Securities and Exchange Act of 1934 (the ‘‘Act’’) 13 in general, and furthers the objectives of Section 6(b)(4) of the Act 14 in particular, in that it is an equitable allocation of reasonable dues, fees and other charges among Exchange members and other persons using its facilities. The Exchange believes that it is reasonable, equitable and not unfairly discriminatory to assess lower fees to preferenced market makers that add or remove liquidity from the complex order book by trading against Priority Customer orders that are preferenced to them in the Select Symbols (excluding SPY), in SPY, in the Non-Select Penny Pilot Symbols and in the Non-Penny Pilot Symbols, than the fee charged to Market Makers because of the requisite quoting obligations applicable to preferenced Market Makers. Preferenced Market Makers have heightened and burdensome quoting obligations to the market which do not apply to the non12 See Securities Exchange Act Release No. 68240 (November 15, 2012), 77 FR 69905 (November 21, 2012) (SR–ISE–2012–88). 13 15 U.S.C. 78f(b). 14 15 U.S.C. 78f(b)(4). E:\FR\FM\04FEN1.SGM 04FEN1 7846 Federal Register / Vol. 78, No. 23 / Monday, February 4, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES preferenced Market Makers or to other market participants and therefore are assessed a lower fee when they transact with a Priority Customer complex order that was preferenced to them for execution.15 Firm Proprietary/BrokerDealer, Non-ISE Market Maker 16 and Professional Customer 17 orders are currently assessed a higher fee than Market Makers while Priority Customers are not assessed a fee for removing liquidity from the complex order book, as is the case on competing exchanges.18 The Exchange operates in a highly competitive market in which market participants can easily and readily direct order flow to competing venues if they deem fee levels at a particular venue to be excessive. ISE and the other options exchanges are engaged in an intense competition on price (and other dimensions of competition) to attract order flow from order flow providers. Accordingly, the fees assessed by the Exchange must remain competitive with fees charged by other venues and therefore must continue to be reasonable and equitably allocated to those members that opt to send orders to the Exchange rather than to a competing venue. In the PHLX Approval Order, the Commission employed a two part test to evaluate whether PHLX’s proposal to adopt a $0.05 per contract differential was consistent with the Act. First, the Commission examined whether the exchange making the proposal was subject to significant competitive forces in setting the terms of its proposal. The Commission noted that if the exchange making the proposal was subject to significant competitive forces in setting 15 Preferenced market makers are required to continuously quote at least 90% of the series of an options class, whereas non-preferenced market makers are required to quote only 60% of the series of an options class. See ISE Rule 804(e). 16 A Non-ISE Market Maker, or Far Away Market Maker (‘‘FARMM’’), is a market maker as defined in Section 3(a)(38) of the Securities Exchange Act of 1934, registered in the same options class on another options exchange. 17 A Professional Customer is a person who is not a broker/dealer and is not a Priority Customer. 18 Firm Proprietary/Broker-Dealer, Non-ISE Market Maker and Professional Customer orders are currently charged $0.40 per contract for removing liquidity in the Select Symbols (excluding SPY) and in the Non-Select Penny Pilot Symbols, $0.41 per contract for removing liquidity in SPY and $0.84 per contract for removing liquidity in the NonPenny Pilot Symbols whereas Market Maker orders are currently charged $0.39 per contract for removing liquidity in the Select Symbols (excluding SPY), in the Non-Select Penny Pilot Symbols and in SPY and $0.82 per contract for removing liquidity in the Non-Penny Pilot Symbols. see also PHLX Pricing Schedule at https://nasdaq omxphlx.cchwallstreet.com/NASDAQOMXPHLX Tools/PlatformViewer.asp?selectednode=chp %5F1%5F4&manual=%2Fnasdaqomxphlx%2 Fphlx%2Fphlx%2Drulesbrd%2F. VerDate Mar<15>2010 19:26 Feb 01, 2013 Jkt 229001 the terms of its proposal, the Commission will approve the proposal unless it determines that there is a substantial countervailing basis to find that the terms nevertheless fail to meet an applicable requirement of the Act or the rules thereunder. With respect to the first part of the analysis, ISE notes that it is subject to significant competitive forces in setting the terms of any fee proposals, including this proposed fee change. The Commission has previously found that there is significant competition for order flow in the options markets.19 There currently are eleven registered national securities exchanges that trade listed options. Competition in the options market is evidenced by data PHLX provided in support of its filing to adopt a $0.05 differential, noting that market share, based on contract volume, among the options exchanges, as of 2012, ranged from approximately less than 1% to 22% for equity options.20 Further, six of the eleven options exchanges have rules that provide for the trading of complex orders.21 Further, data regarding market share among the options exchanges for complex orders also shows that there is significant competition for order flow. For example, for June 1, 2012, the market share for complex orders ranged from 3.39% for NYSE Arca, which had 74,486 complex order trades, to 43.79% for ISE, which had 961,040 complex order trades.22 Moreover, the volume for complex orders has been increasing over the past few years.23 Additionally, the proposed fees will apply only to equity options that are able to be listed and traded on more than one options exchange, and are therefore subject to 19 See Securities Exchange Act Release No. 61317 (January 8, 2010), 75 FR 2915 (January 19, 2010) (SR–ISE–2009–103) (finding that the exchange was subject to significant competitive forces in setting the terms of its proposal, including fees, and noting that ‘‘the Exchange has a compelling need to attract order flow to maintain its share of trading volume, imposing pressure on the Exchange to act reasonably in establishing fees for these data offerings’’). 20 See Letter from Joan C. Conley, Senior Vice President and Corporate Secretary, NASDAQ OMX, dated July 26, 2012 (‘‘PHLX Letter’’). 21 See C2 Rule 6.13; CBOE Rules 6.42, 6.45, 6.53C; PHLX Rule 1080; NYSE Arca Rules 6.62(e), 6.91; NYSE MKT Rules 900.3NY(e), 963NY, 980NY. 22 See PHLX Supporting Data, at https:// www.sec.gov/comments/sr-phlx-2012-27/phlx 201227-2.pdf. 23 See Complex Orders Surge, Traders Magazine, March 2012 (noting increase in use of customer orders by customers at one broker-dealer in 2011); see also BATS February 2012 Options Market Update, at https://www.batstrading.com/resources/ fee_schedule/2012/BATS-February-2012-USMarketUpdate.pdf (noting that more volume is being done through complex strategies, and that volume in the complex order book has increased). PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 competition among the markets for order flow.24 With respect to second part of the analysis, the Exchange does not believe that there is a substantial countervailing basis to find that the proposed rule change fails to meet the requirements of the Act or the rules thereunder. The Exchange notes that the fees for adding or removing liquidity as proposed distinguish between preferenced Market Makers and non-preferenced Market Makers, and would provide the preferenced Market Makers a lower fee than non-preferenced Market Makers when the preferenced Market Maker interacts with order flow that has been preferenced to them. The Exchange notes in part that preferenced Market Makers that execute against order flow in the complex order book that has been preferenced to them do not have a guaranteed allocation,25 unlike in the leg market, and that the reduced fee for preferenced Market Makers is an attempt to confer an additional benefit on preferenced Market Makers for the value they provide in bringing order flow to the Exchange. The Exchange further notes that increased order flow provides better execution quality on the Exchange because customers enjoy greater price transparency and executions at lower prices, and that Market Makers to whom order flow is preferenced still must compete with other Exchange participants to interact with that order flow to receive the benefits of such arrangements. This increased order flow, and corresponding greater execution quality, benefits all market participants. The Commission has previously approved as consistent with the Act rules of exchanges that provide preferenced Market Makers a guaranteed allocation when they interact with preferenced order flow, based upon their status as preferenced market makers.26 Likewise, preferenced Market Makers on ISE would be charged a lower fee when they interact with order flow preferenced to them, based on their status as preferenced Market Makers. When approving the proposals that provided a guaranteed allocation to preferenced market makers, the Commission found that the guaranteed allocation for preferenced market makers would not affect the incentives 24 There will be no discount for Singly Listed Symbols and FX Options Symbols because these symbols are traded only on ISE and therefore they are not subject to competition for order flow. 25 See supra note 10. 26 See Securities Exchange Act Release No. 51759 (May 27, 2005), 70 FR 32860 (June 6, 2005) (Order Approving SR–PHLX–2004–91). E:\FR\FM\04FEN1.SGM 04FEN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 78, No. 23 / Monday, February 4, 2013 / Notices of the trading crowd to compete aggressively for orders based on price.27 The Exchange believes that the potential impact of a guaranteed allocation on competition may be distinguished from the potential impact of the reduced transaction fee on competition. Specifically, the guaranteed allocation does not provide preferenced market makers an explicit subsidy—in the form of lesser per contract fees—over other market makers that are competing to execute against the same order flow. Rather, the guaranteed allocation scheme allocates portions of orders to other market makers who are at the same price as the preferenced market maker, thus protecting the incentive of other market makers to compete with preferenced market makers on price. In contrast, assessing a lesser transaction fee on preferenced market makers than other market makers when the preferenced market makers interact with order flow preferenced to them may allow preferenced market makers to execute against complex orders at more aggressive prices than other market makers, which may reduce the incentive and ability of such other market makers to compete with preferenced market makers on price. The Exchange has considered the potential impact of the fees for adding and removing liquidity on preferenced Market Makers and the $0.05 fee differential on competition between preferenced Market Makers and other Market Makers that are competing to execute against the same order flow. In the PHLX Approval Order, the Commission noted that for the two months during which the PHLX $0.05 price differential was in effect, there was no statistically significant adverse impact on the competitiveness of the PHLX market for directed (i.e., preferenced) customer complex orders. Given that the Exchange is proposing to implement the same $0.05 cent differential for preferenced Priority Customer complex orders, the Exchange believes there will not be any statistical significant adverse impact of the proposed fee differential on the competitiveness of the ISE market for preferenced Priority Customer complex orders, or the extent of price improvement for preferenced Priority Customer complex orders on the ISE. Nevertheless, like PHLX, ISE is proposing to adopt the $0.05 discount for preferenced Priority Customer complex orders on a pilot basis and will provide data to the Commission to 27 Id. VerDate Mar<15>2010 19:26 Feb 01, 2013 Jkt 229001 further evaluate whether there is any adverse impact.28 B. Self-Regulatory Organization’s Statement on Burden on Competition ISE does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes this proposal, which seeks to adopt a fee discount applicable to Market Makers for executing orders that are preferenced to them, will enhance competition because the Exchange is seeking to adopt a fee discount that is already in place at one other exchange. The Exchange believes that the proposed rule change will promote competition, as it is designed to allow ISE to better compete for order flow and allow Market Makers to execute more of their transactions on the Exchange and therefore, improve the Exchange’s competitive position. ISE also does not believe that the proposed rule change will impose any burden on competition among market participants on ISE that is not necessary or appropriate in furtherance of the purposes of the Act because, as noted above, preferenced Market Makers have heightened and burdensome quoting obligations to the market that non-preferenced Market Makers or other market participants do not have and therefore preferenced Market Makers may be assessed a lower fee when they transact with Priority Customer complex orders that are preferenced to them for execution. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from members or other interested parties. 28 For purposes of studying the competitive impact of the proposed fee change, ISE agrees to provide data on the rate of interaction with preferenced Priority Customer complex orders by both preferenced Market Makers and nonpreferenced Market Makers. This data will cover the six months prior to the time the proposed fee was in effect. For the same time period, ISE also agrees to provide data on rates of price improvement for preferenced Priority Customer complex orders that received price improvement by both preferenced Market Makers and non-preferenced Market Makers. For the same time period, ISE also agrees to provide data on the percentage of preferenced and non-preferenced Priority Customer complex orders that received price improvement, and the average price improvement for such orders. PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 7847 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act 29 and subparagraph (f)(2) of Rule 19b–4 thereunder,30 because it establishes a due, fee, or other charge imposed by ISE. At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–ISE–2013–05 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–ISE–2013–05. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than 29 15 30 17 E:\FR\FM\04FEN1.SGM U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). 04FEN1 7848 Federal Register / Vol. 78, No. 23 / Monday, February 4, 2013 / Notices those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington DC, 20549–1090, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal offices of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–ISE– 2013–05, and should be submitted on or before February 25, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.31 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–02302 Filed 2–1–13; 8:45 am] BILLING CODE 8011–01–P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #13369 and #13370] Connecticut Disaster Number CT– 00028 U.S. Small Business Administration. ACTION: Amendment 3. AGENCY: This is an amendment of the Presidential declaration of a major disaster for the State of Connecticut (FEMA–4087–DR), dated 10/30/2012. Incident: Hurricane Sandy. Incident Period: 10/27/2012 through 11/08/2012. Effective Date: 01/25/2013. Physical Loan Application Deadline Date: 02/12/2013. EIDL Loan Application Deadline Date: 07/31/2013. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street SW., Suite 6050, Washington, DC 20416. SUPPLEMENTARY INFORMATION: The notice of the President’s major disaster declaration for the State of Connecticut, dated 10/30/2012 is hereby amended to mstockstill on DSK4VPTVN1PROD with NOTICES SUMMARY: extend the deadline for filing applications for physical damages as a result of this disaster to 02/12/2013. All other information in the original declaration remains unchanged. (Catalog of Federal Domestic Assistance Numbers 59002 and 59008) James E. Rivera, Associate Administrator for Disaster Assistance. [FR Doc. 2013–02339 Filed 2–1–13; 8:45 am] BILLING CODE 8025–01–P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #13367 and #13368] New Jersey Disaster Number NJ–00033 U.S. Small Business Administration. AGENCY: ACTION: Amendment 5. This is an amendment of the Presidential declaration of a major disaster for the State of New Jersey (FEMA–4086–DR), dated 10/30/2012. Incident: Hurricane Sandy. Incident Period: 10/26/2012 through 11/08/2012. Effective Date: 01/24/2013. Physical Loan Application Deadline Date: 03/01/2013. EIDL Loan Application Deadline Date: 07/31/2013. SUMMARY: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. ADDRESSES: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street SW., Suite 6050, Washington, DC 20416. FOR FURTHER INFORMATION CONTACT: CFR 200.30–3(a)(12). VerDate Mar<15>2010 19:26 Feb 01, 2013 New York Disaster Number NY–00130 U.S. Small Business Administration. ACTION: Amendment 5. AGENCY: This is an amendment of the Presidential declaration of a major disaster for the State of New York (FEMA–4085–DR), dated 10/30/2012. Incident: Hurricane Sandy. Incident Period: 10/27/2012 through 11/08/2012. Effective Date: 01/25/2013. Physical Loan Application Deadline Date: 02/27/2013. EIDL Loan Application Deadline Date: 07/31/2013. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street SW., Suite 6050, Washington, DC 20416. SUPPLEMENTARY INFORMATION: The notice of the President’s major disaster declaration for the State of New York, dated 10/30/2012 is hereby amended to extend the deadline for filing applications for physical damages as a result of this disaster to 02/27/2013. All other information in the original declaration remains unchanged. SUMMARY: (Catalog of Federal Domestic Assistance Numbers 59002 and 59008) James E. Rivera, Associate Administrator for Disaster Assistance. [FR Doc. 2013–02347 Filed 2–1–13; 8:45 am] BILLING CODE 8025–01–P SMALL BUSINESS ADMINISTRATION (Catalog of Federal Domestic Assistance Numbers 59002 and 59008) SUMMARY: James E. Rivera, Associate Administrator for Disaster Assistance. BILLING CODE 8025–01–P Jkt 229001 [Disaster Declaration #13365 and #13366] The notice of the President’s major disaster declaration for the State of New Jersey, dated 10/30/2012 is hereby amended to extend the deadline for filing applications for physical damages as a result of this disaster to 03/01/2013. All other information in the original declaration remains unchanged. SUPPLEMENTARY INFORMATION: [FR Doc. 2013–02348 Filed 2–1–13; 8:45 am] 31 17 SMALL BUSINESS ADMINISTRATION PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 [Disaster Declaration # 13463 and # 13464] Pennsylvania Disaster Number PA– 00057 U.S. Small Business Administration. ACTION: Amendment 1. AGENCY: This is an amendment of the Presidential declaration of a major disaster for Public Assistance Only for the Commonwealth of Pennsylvania (FEMA–4099–DR), dated 01/10/2013. Incident: Hurricane Sandy. Incident Period: 10/26/2012 through 11/08/2012. E:\FR\FM\04FEN1.SGM 04FEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 23 (Monday, February 4, 2013)]
[Notices]
[Pages 7844-7848]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-02302]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68760; File No. SR-ISE-2013-05]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Amend Certain Market Maker Fees

January 29, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on January 17, 2013, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission the proposed rule change, as described in Items I, 
II, and III below, which items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The ISE proposes to amend its Schedule of Fees. The text of the 
proposed rule change is available on the Exchange's Web site (https://www.ise.com), at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in sections A, B and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange currently assesses per contract transaction fees and 
provides rebates to market participants that add or remove liquidity 
from the Exchange (``maker/taker fees and rebates'') in a number of 
options classes (the ``Select Symbols'').\3\ The Exchange's maker/taker 
fees and rebates are applicable to regular and complex orders executed 
in the Select Symbols. The Exchange also currently assesses maker/taker 
fees and rebates for complex orders in symbols that are in the Penny 
Pilot program but are not a Select Symbol (``Non-Select Penny Pilot 
Symbols'') \4\ and for complex orders in all symbols that are not in 
the Penny Pilot Program (``Non-Penny Pilot Symbols'').\5\
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    \3\ Options classes subject to maker/taker fees and rebates are 
identified by their ticker symbol on the Exchange's Schedule of 
Fees.
    \4\ See Exchange Act Release Nos. 65724 (November 10, 2011), 76 
FR 71413 (November 17, 2011) (SR-ISE-2011-72); and 66961 (May 10, 
2012), 77 FR 28914 (May 16, 2012) (SR-ISE-2012-38).
    \5\ See Exchange Act Release Nos. 66084 (January 3, 2012), 77 FR 
1103 (January 9, 2012) (SR-ISE-2011-84); 66392 (February 14, 2012), 
77 FR 10016 (February 21, 2012) (SR-ISE-2012-06); 66961 (May 10, 
2012), 77 FR 28914 (May 16, 2012) (SR-ISE-2012-38); and 67400 (July 
11, 2012), 77 FR 42036 (July 17, 2012) (SR-ISE-2012-63).
---------------------------------------------------------------------------

    The purpose of this proposed rule change is to increase the 
discount for Market Makers \6\ when they trade against Priority 
Customer \7\ orders that are preferenced to them to $0.05 per contract 
from the fee charged to Market Makers who trade against Priority 
Customer orders that are not preferenced to them. This discount is 
currently set at $0.02 per contract and is applicable when Market 
Makers add or remove liquidity in the Select Symbols (excluding SPY), 
in SPY, in the Non-Select Penny Pilot Symbols and in the Non-Penny 
Pilot Symbols from the complex order book.\8\ Accordingly, Market 
Makers that add or remove liquidity from the complex order book by 
trading against Priority Customer complex orders that are preferenced 
to them will be charged: (i) $0.34 per contract in the Select Symbols 
(including SPY) and in the Non-Select Penny Pilot Symbols; and (ii) 
$0.77 per contract in the Non-Penny Pilot Symbols.
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    \6\ The term ``Market Makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See ISE Rule 
100(a)(25).
    \7\ A Priority Customer is defined in ISE Rule 100(a)(37A) as a 
person or entity that is not a broker/dealer in securities, and does 
not place more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s).
    \8\ The current $0.02 per contract discount also applies to a 
group of symbols in which Market Makers can enter quotes in the 
complex order book (``Complex Quoting Symbols''). The discount 
applicable to the Complex Quoting Symbols is found on the Exchange's 
Schedule of Fees. See Section II. Complex Order Fees and Rebates, 
footnote 4. This proposed rule change also applies to the Complex 
Quoting Symbols.

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[[Page 7845]]

    The Exchange notes that NASDAQ OMX PHLX, Inc. (``PHLX'') currently 
has a $0.05 per contract differential between the fee it charges market 
makers for complex orders in certain symbols and the fee it charges 
directed (i.e., preferenced) market makers for the same 
transactions.\9\ With this proposed rule change, ISE seeks to adopt the 
$0.05 differential currently in place at PHLX.
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    \9\ See Section I, Rebates and Fees for Adding and Removing 
Liquidity in Select Symbols, Part B. Complex Order at https://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLXTools/PlatformViewer.asp?selectednode=chp%5F1%5F4&manual=%2Fnasdaqomxphlx%2Fphlx%2Fphlx%2Drulesbrd%2F. see also Securities Exchange Act Release 
No. 68202 (November 9, 2012), 77 FR 68856 (November 16, 2012) (the 
``PHLX Approval Order'').
---------------------------------------------------------------------------

    The Exchange notes that the fee differential currently between 
Market Makers and preferenced Market Makers on ISE is $0.02 per 
contract where a preferenced Market Maker is assessed the lower fee. 
The Exchange is now proposing to increase the differential from $0.02 
per contract to $0.05 per contract for complex order transactions to 
reflect the increased costs that are incurred by such Market Makers 
that enter into order flow arrangements at a cost and without the 
benefit of a guaranteed allocation.\10\ The Exchange believes that in 
order to attract Priority Customer complex orders in an intensely 
competitive environment it must continue to adjust its fees and 
rebates, which ultimately benefit all market participants.
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    \10\ The Exchange notes that under ISE Rule 722(b)(3), the 
Exchange has the ability to provide Market Makers with a guaranteed 
allocation and the Exchange may do so by designating on a class 
basis where such guaranteed allocations would apply. The Exchange, 
however, has not designated any class as such. In the event the 
Exchange designates certain classes to provide Market Makers the 
benefit of a guaranteed allocation in those classes, the discount 
proposed in this filing will not apply to those preferenced Market 
Makers in those classes of options designated by the Exchange.
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    Market Makers may be categorized as preferenced Market Makers when 
such Market Makers execute against a Priority Customer order 
preferenced to them for execution by an order flow provider. For 
example, Market Maker ABCD is assessed the preferenced Market Maker fee 
for trading against a Priority Customer order preferenced to it for 
execution by an order flow provider. Market Maker ABCD is not assessed 
the discounted preferenced Market Maker fee for executing a Priority 
Customer order that is not preferenced to Market Maker ABCD, but rather 
is assessed the full Market Maker fee.
    The Exchange notes that all Market Makers have the ability to 
incentivize an order flow provider to preference an order if they 
desire to enter into, for example, a payment for order flow arrangement 
with an order flow provider. While all market participants enjoy the 
benefits of the liquidity that such order flow brings to the market, 
not all market participants incur the additional expense of paying an 
order flow provider for such order flow. The Exchange believes that 
this additional expense should be considered in assessing fees to 
Market Makers that attract such order flow to the Exchange for the 
benefit of all market participants.
    The Exchange proposes to implement this proposed rule change on a 
pilot basis set to expire one (1) year from the date the proposed fees 
become operative. In support of this proposed rule change, the Exchange 
agrees to submit to the Commission on a monthly basis during the pilot 
period certain summary data as the Commission may request regarding 
this proposed fee change and make this data publicly available. The 
data would include information with respect to rates of order 
interaction of Priority Customer complex orders and rates of price 
improvement, and an analysis of the effect of the fee differential upon 
inter-market and intra-market competition. In addition, the Exchange 
also agrees to submit data, and make it publicly available, on (1) the 
rate of interaction with preferenced Priority Customer complex orders 
by both preferenced Market Makers and non-preferenced Market Makers, 
(2) the rates of price improvement for preferenced Priority Customer 
complex orders that received price improvement by both preferenced 
Market Makers and non-preferenced Market Makers, and (3) the percentage 
of preferenced and non-preferenced Priority Customer complex orders 
that received price improvement, and the average price improvement for 
such orders, for the six months prior to the time that this proposed 
fee became operative (i.e., July 2012 through December 2012) to allow 
the Commission to analyze the impact of the proposed fee change.
    The Exchange represents that the proposed fee change will apply 
only to equity options that are able to be listed and traded on more 
than one options exchange. There will be no discount for Singly Listed 
Symbols and FX Options Symbols.\11\ The Exchange further represents 
that, prior to and at the time of a complex order transaction, Market 
Makers, including preferenced Market Makers, are unaware of the 
identity of the contra-party to the transaction and moreover, ISE Rule 
400 titled ``Just and Equitable Principles of Trade'' is intended to 
prohibit coordinated actions between preferenced Market Makers and 
order flow providers, and that the Exchange proactively conducts 
surveillance for, and enforces against, such violations.
---------------------------------------------------------------------------

    \11\ Singly Listed Symbols and FX Options Symbols are identified 
by their ticker symbol on the Exchange's Schedule of Fees. The 
Exchange is not providing this fee discount to Singly Listed Symbols 
and FX Options Symbols because these symbols are traded only on ISE 
and therefore, the Exchange does not need to provide an incentive to 
attract order flow in them.
---------------------------------------------------------------------------

    The Exchange also proposes to make one non-substantive amendment to 
the Exchange's Schedule of Fees. Specifically, the Exchange proposes to 
remove footnote 7 under Section I, Regular Order Fees and Rebates, as 
that footnote is no longer applicable. Footnote 7 was previously 
applicable to Special Non-Select Penny Pilot Symbols (``SNS Symbols''), 
a group of symbols that were a part of Section I of the Schedule of 
Fees. The Exchange recently removed the SNS Symbols from the Schedule 
of Fees in its entirety and moved them into the Select Symbols 
category.\12\ The Exchange inadvertently failed to remove footnote 7 
when it filed to remove the SNS Symbols and proposes to do so now.
---------------------------------------------------------------------------

    \12\ See Securities Exchange Act Release No. 68240 (November 15, 
2012), 77 FR 69905 (November 21, 2012) (SR-ISE-2012-88).
---------------------------------------------------------------------------

    The Exchange is not proposing any other changes in this filing.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Schedule of 
Fees is consistent with Section 6(b) of the Securities and Exchange Act 
of 1934 (the ``Act'') \13\ in general, and furthers the objectives of 
Section 6(b)(4) of the Act \14\ in particular, in that it is an 
equitable allocation of reasonable dues, fees and other charges among 
Exchange members and other persons using its facilities.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The Exchange believes that it is reasonable, equitable and not 
unfairly discriminatory to assess lower fees to preferenced market 
makers that add or remove liquidity from the complex order book by 
trading against Priority Customer orders that are preferenced to them 
in the Select Symbols (excluding SPY), in SPY, in the Non-Select Penny 
Pilot Symbols and in the Non-Penny Pilot Symbols, than the fee charged 
to Market Makers because of the requisite quoting obligations 
applicable to preferenced Market Makers. Preferenced Market Makers have 
heightened and burdensome quoting obligations to the market which do 
not apply to the non-

[[Page 7846]]

preferenced Market Makers or to other market participants and therefore 
are assessed a lower fee when they transact with a Priority Customer 
complex order that was preferenced to them for execution.\15\ Firm 
Proprietary/Broker-Dealer, Non-ISE Market Maker \16\ and Professional 
Customer \17\ orders are currently assessed a higher fee than Market 
Makers while Priority Customers are not assessed a fee for removing 
liquidity from the complex order book, as is the case on competing 
exchanges.\18\
---------------------------------------------------------------------------

    \15\ Preferenced market makers are required to continuously 
quote at least 90% of the series of an options class, whereas non-
preferenced market makers are required to quote only 60% of the 
series of an options class. See ISE Rule 804(e).
    \16\ A Non-ISE Market Maker, or Far Away Market Maker 
(``FARMM''), is a market maker as defined in Section 3(a)(38) of the 
Securities Exchange Act of 1934, registered in the same options 
class on another options exchange.
    \17\ A Professional Customer is a person who is not a broker/
dealer and is not a Priority Customer.
    \18\ Firm Proprietary/Broker-Dealer, Non-ISE Market Maker and 
Professional Customer orders are currently charged $0.40 per 
contract for removing liquidity in the Select Symbols (excluding 
SPY) and in the Non-Select Penny Pilot Symbols, $0.41 per contract 
for removing liquidity in SPY and $0.84 per contract for removing 
liquidity in the Non-Penny Pilot Symbols whereas Market Maker orders 
are currently charged $0.39 per contract for removing liquidity in 
the Select Symbols (excluding SPY), in the Non-Select Penny Pilot 
Symbols and in SPY and $0.82 per contract for removing liquidity in 
the Non-Penny Pilot Symbols. see also PHLX Pricing Schedule at 
https://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLXTools/PlatformViewer.asp?selectednode=chp%5F1%5F4&manual=%2Fnasdaqomxphlx%2Fphlx%2Fphlx%2Drulesbrd%2F.
---------------------------------------------------------------------------

    The Exchange operates in a highly competitive market in which 
market participants can easily and readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive. ISE and the other options exchanges are engaged in an 
intense competition on price (and other dimensions of competition) to 
attract order flow from order flow providers. Accordingly, the fees 
assessed by the Exchange must remain competitive with fees charged by 
other venues and therefore must continue to be reasonable and equitably 
allocated to those members that opt to send orders to the Exchange 
rather than to a competing venue.
    In the PHLX Approval Order, the Commission employed a two part test 
to evaluate whether PHLX's proposal to adopt a $0.05 per contract 
differential was consistent with the Act. First, the Commission 
examined whether the exchange making the proposal was subject to 
significant competitive forces in setting the terms of its proposal. 
The Commission noted that if the exchange making the proposal was 
subject to significant competitive forces in setting the terms of its 
proposal, the Commission will approve the proposal unless it determines 
that there is a substantial countervailing basis to find that the terms 
nevertheless fail to meet an applicable requirement of the Act or the 
rules thereunder.
    With respect to the first part of the analysis, ISE notes that it 
is subject to significant competitive forces in setting the terms of 
any fee proposals, including this proposed fee change. The Commission 
has previously found that there is significant competition for order 
flow in the options markets.\19\ There currently are eleven registered 
national securities exchanges that trade listed options. Competition in 
the options market is evidenced by data PHLX provided in support of its 
filing to adopt a $0.05 differential, noting that market share, based 
on contract volume, among the options exchanges, as of 2012, ranged 
from approximately less than 1% to 22% for equity options.\20\ Further, 
six of the eleven options exchanges have rules that provide for the 
trading of complex orders.\21\ Further, data regarding market share 
among the options exchanges for complex orders also shows that there is 
significant competition for order flow. For example, for June 1, 2012, 
the market share for complex orders ranged from 3.39% for NYSE Arca, 
which had 74,486 complex order trades, to 43.79% for ISE, which had 
961,040 complex order trades.\22\ Moreover, the volume for complex 
orders has been increasing over the past few years.\23\ Additionally, 
the proposed fees will apply only to equity options that are able to be 
listed and traded on more than one options exchange, and are therefore 
subject to competition among the markets for order flow.\24\
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    \19\ See Securities Exchange Act Release No. 61317 (January 8, 
2010), 75 FR 2915 (January 19, 2010) (SR-ISE-2009-103) (finding that 
the exchange was subject to significant competitive forces in 
setting the terms of its proposal, including fees, and noting that 
``the Exchange has a compelling need to attract order flow to 
maintain its share of trading volume, imposing pressure on the 
Exchange to act reasonably in establishing fees for these data 
offerings'').
    \20\ See Letter from Joan C. Conley, Senior Vice President and 
Corporate Secretary, NASDAQ OMX, dated July 26, 2012 (``PHLX 
Letter'').
    \21\ See C2 Rule 6.13; CBOE Rules 6.42, 6.45, 6.53C; PHLX Rule 
1080; NYSE Arca Rules 6.62(e), 6.91; NYSE MKT Rules 900.3NY(e), 
963NY, 980NY.
    \22\ See PHLX Supporting Data, at https://www.sec.gov/comments/sr-phlx-2012-27/phlx201227-2.pdf.
    \23\ See Complex Orders Surge, Traders Magazine, March 2012 
(noting increase in use of customer orders by customers at one 
broker-dealer in 2011); see also BATS February 2012 Options Market 
Update, at https://www.batstrading.com/resources/fee_schedule/2012/BATS-February-2012-USMarket-Update.pdf (noting that more volume is 
being done through complex strategies, and that volume in the 
complex order book has increased).
    \24\ There will be no discount for Singly Listed Symbols and FX 
Options Symbols because these symbols are traded only on ISE and 
therefore they are not subject to competition for order flow.
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    With respect to second part of the analysis, the Exchange does not 
believe that there is a substantial countervailing basis to find that 
the proposed rule change fails to meet the requirements of the Act or 
the rules thereunder. The Exchange notes that the fees for adding or 
removing liquidity as proposed distinguish between preferenced Market 
Makers and non-preferenced Market Makers, and would provide the 
preferenced Market Makers a lower fee than non-preferenced Market 
Makers when the preferenced Market Maker interacts with order flow that 
has been preferenced to them. The Exchange notes in part that 
preferenced Market Makers that execute against order flow in the 
complex order book that has been preferenced to them do not have a 
guaranteed allocation,\25\ unlike in the leg market, and that the 
reduced fee for preferenced Market Makers is an attempt to confer an 
additional benefit on preferenced Market Makers for the value they 
provide in bringing order flow to the Exchange.
---------------------------------------------------------------------------

    \25\ See supra note 10.
---------------------------------------------------------------------------

    The Exchange further notes that increased order flow provides 
better execution quality on the Exchange because customers enjoy 
greater price transparency and executions at lower prices, and that 
Market Makers to whom order flow is preferenced still must compete with 
other Exchange participants to interact with that order flow to receive 
the benefits of such arrangements. This increased order flow, and 
corresponding greater execution quality, benefits all market 
participants.
    The Commission has previously approved as consistent with the Act 
rules of exchanges that provide preferenced Market Makers a guaranteed 
allocation when they interact with preferenced order flow, based upon 
their status as preferenced market makers.\26\ Likewise, preferenced 
Market Makers on ISE would be charged a lower fee when they interact 
with order flow preferenced to them, based on their status as 
preferenced Market Makers.
---------------------------------------------------------------------------

    \26\ See Securities Exchange Act Release No. 51759 (May 27, 
2005), 70 FR 32860 (June 6, 2005) (Order Approving SR-PHLX-2004-91).
---------------------------------------------------------------------------

    When approving the proposals that provided a guaranteed allocation 
to preferenced market makers, the Commission found that the guaranteed 
allocation for preferenced market makers would not affect the 
incentives

[[Page 7847]]

of the trading crowd to compete aggressively for orders based on 
price.\27\ The Exchange believes that the potential impact of a 
guaranteed allocation on competition may be distinguished from the 
potential impact of the reduced transaction fee on competition. 
Specifically, the guaranteed allocation does not provide preferenced 
market makers an explicit subsidy--in the form of lesser per contract 
fees--over other market makers that are competing to execute against 
the same order flow. Rather, the guaranteed allocation scheme allocates 
portions of orders to other market makers who are at the same price as 
the preferenced market maker, thus protecting the incentive of other 
market makers to compete with preferenced market makers on price. In 
contrast, assessing a lesser transaction fee on preferenced market 
makers than other market makers when the preferenced market makers 
interact with order flow preferenced to them may allow preferenced 
market makers to execute against complex orders at more aggressive 
prices than other market makers, which may reduce the incentive and 
ability of such other market makers to compete with preferenced market 
makers on price.
---------------------------------------------------------------------------

    \27\ Id.
---------------------------------------------------------------------------

    The Exchange has considered the potential impact of the fees for 
adding and removing liquidity on preferenced Market Makers and the 
$0.05 fee differential on competition between preferenced Market Makers 
and other Market Makers that are competing to execute against the same 
order flow. In the PHLX Approval Order, the Commission noted that for 
the two months during which the PHLX $0.05 price differential was in 
effect, there was no statistically significant adverse impact on the 
competitiveness of the PHLX market for directed (i.e., preferenced) 
customer complex orders. Given that the Exchange is proposing to 
implement the same $0.05 cent differential for preferenced Priority 
Customer complex orders, the Exchange believes there will not be any 
statistical significant adverse impact of the proposed fee differential 
on the competitiveness of the ISE market for preferenced Priority 
Customer complex orders, or the extent of price improvement for 
preferenced Priority Customer complex orders on the ISE. Nevertheless, 
like PHLX, ISE is proposing to adopt the $0.05 discount for preferenced 
Priority Customer complex orders on a pilot basis and will provide data 
to the Commission to further evaluate whether there is any adverse 
impact.\28\
---------------------------------------------------------------------------

    \28\ For purposes of studying the competitive impact of the 
proposed fee change, ISE agrees to provide data on the rate of 
interaction with preferenced Priority Customer complex orders by 
both preferenced Market Makers and non-preferenced Market Makers. 
This data will cover the six months prior to the time the proposed 
fee was in effect. For the same time period, ISE also agrees to 
provide data on rates of price improvement for preferenced Priority 
Customer complex orders that received price improvement by both 
preferenced Market Makers and non-preferenced Market Makers. For the 
same time period, ISE also agrees to provide data on the percentage 
of preferenced and non-preferenced Priority Customer complex orders 
that received price improvement, and the average price improvement 
for such orders.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    ISE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes this 
proposal, which seeks to adopt a fee discount applicable to Market 
Makers for executing orders that are preferenced to them, will enhance 
competition because the Exchange is seeking to adopt a fee discount 
that is already in place at one other exchange. The Exchange believes 
that the proposed rule change will promote competition, as it is 
designed to allow ISE to better compete for order flow and allow Market 
Makers to execute more of their transactions on the Exchange and 
therefore, improve the Exchange's competitive position. ISE also does 
not believe that the proposed rule change will impose any burden on 
competition among market participants on ISE that is not necessary or 
appropriate in furtherance of the purposes of the Act because, as noted 
above, preferenced Market Makers have heightened and burdensome quoting 
obligations to the market that non-preferenced Market Makers or other 
market participants do not have and therefore preferenced Market Makers 
may be assessed a lower fee when they transact with Priority Customer 
complex orders that are preferenced to them for execution.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \29\ and subparagraph (f)(2) of Rule 19b-4 
thereunder,\30\ because it establishes a due, fee, or other charge 
imposed by ISE.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \30\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ISE-2013-05 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2013-05. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than

[[Page 7848]]

those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington DC, 20549-1090, on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be 
available for inspection and copying at the principal offices of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-ISE-
2013-05, and should be submitted on or before February 25, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-02302 Filed 2-1-13; 8:45 am]
BILLING CODE 8011-01-P

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